Texas Central Railway's Fuzzy Definition of 'Privately Financed'

Since it went public with plans to build a high-speed rail line between Dallas and Houston, Texas Central Railway has been adamant that it won't be suckling at the government teat. The project would be entirely private, allowed to rise and fall on its own merits, as judged by the market, without public subsidy or financing adding artificial buoyancy. "If we start taking the federal money, it takes twice as long, costs twice as much," Texas Central President Robert Eckels told the Texas Tribune in 2012. "My guess is we'd end up pulling the plug." The sentiment is also reflected on the company's website: "This project is not backed by public funds."

Recently, however, Texas Central's rhetoric has subtly shifted. While still abjuring outright subsidy, the company is now indicating that it will welcome less direct forms of government support for financing the estimated $10 billion project. In an interview last week, freshly minted Texas Central CEO Tim Keith described "existing programs we'd like to target" that provide federal loans to rail ventures, specifically the Transportation Infrastructure Finance and Innovation Act (TIFIA) and the Railroad Rehabilitation and Improvement Financing (RRIF) program. If those fall through, Keith says Texas Central will likely sell tax-exempt private-activity bonds, a type of financing that requires government approval and that is commonly used for public-private highway projects like the North Tarrant Express in Fort Worth. Money from these programs, Keith said, will complement money from other sources including "multiple billions of dollars" from the Japan Bank for International Cooperation (which is technically a public entity but who cares because the Japanese taxpayers are on the hook) and institutional investors such as pension funds and insurance companies, which are expected to own about a third of the project.

Baruch Feigenbaum, a transportation policy analyst at the libertarian-leaning Reason Foundation, has offered a cautious endorsement of Texas Central's plan despite his acute skepticism about high-speed rail in the U.S. more generally. In 2013, he wrote a paper dismissing American high-speed rail as a pointless boondoggle, but most of factors that led him to that conclusion stemmed from the inefficiencies and pork-barrel politics inherent in government projects — factors that Texas Central would avoid by going all private. In a May column, he called the plan "far more promising" than previous rail efforts. "Nobody knows if such a private line can succeed, but Texas Central Railway certainly deserves a chance to try."

That was before Texas Central began talking about pursuing federal loan programs and private-activity bonds. The prospect "makes me a little more uneasy," he said on Monday. Not that Texas Central automatically forfeits his support by going that route. He'd probably be fine with them taking a small loan, particularly from TIFIA, or issuing private-activity bonds, which still preserves the market as the primary assessor of a project's viability. His assessment would change if the company leans on those programs for a lot of money, or if it uses the RRIF program, which he views as fundamentally flawed. "Not only is [RRIF] government support, it's also the failure of what I would call checks and balances." Further contributing to his uneasiness is Texas Central's oft-repeated promise that the project would be totally privately funded.

Texas Central maintains that it's been up front about how it will finance the project. A spokesman says the company has "been very transparent about consideration of RRIF and TIFIA" and devoted a section to it on its website. However, that section was mistakenly deleted during an update of the website shortly before Keith was announced as CEO in July. Three months before that, in testimony opposing a bill that would have prevented the sale of bonds to construct high-speed rail project, Lawless left open the possibility of using private-activity bonds. "We do not intend in our current plan of finance to use private activity bonds — we do not. That said, we see private activity bonds as a tool, as an instrument, out there that as we progress further and get to our financial closing, we may want to look at. But right now we are not considering them."

None of this is to say that Texas Central shouldn't seek government support. Feigenbaum's colleague at the Reason Foundation, Robert Poole, is untroubled by the potential federal support. And it makes financial sense for the company to minimize long-term debt costs by searching out the cheapest source of cash available. Similarly, no fundamental reason exits why the government shouldn't support high-speed rail. "Nobody ever says our road system has to be profitable or our airports need to be profitable," says Andy Kunz, president of the U.S. High Speed Rail Association. The notion that rail should be held to a different standard is a "myth that needs to be dismantled." 

But that's a different debate. The fact is that Texas Central has, as a matter of political and public-relations expediency, led the public to believe that it wouldn't receive material support from the government. Now that seems less certain.

This article has been updated with a response from Texas Central.

Update August 13: Texas Central CEO Tim Keith gave us the following statement late yesterday:

“As we’ve said previously, this project is being developed according to market-led principles and driven by private investors. All equity investment to develop and build the rail system will be private. Texas Central will explore all forms of capital available to private companies to finance debt for this project. These options include federal debt programs designed to attract private investment to improve and innovate US infrastructure, such as RIFF and TIFIA.”
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Eric Nicholson
Contact: Eric Nicholson

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